Earnings Season has been highlighted by positive numbers as of late in the S&P 500: 4Q16 saw total earnings at an all-time high and 1Q17 carried the momentum with double-digit earnings growth. As it stands, reports for 2Q17 have yielded yet another double-digit year over year earnings growth while on pace to set another total earnings record. In 13 years, this is the highest percentage of companies reporting earnings results that beat both top and bottom line analyst expectations.[1] But despite the promising results in company earnings, it seems that these numbers have little to no impact on a stock’s relative performance to that of the S&P 500.

The chart below shows the one- day relative performance of a stock after reporting earnings that beat both top and bottom line estimates and the one-day relative performance of a stock that missed on both top and bottom line estimates. Basically, it tracks how the average company that beat earnings expectations compares to the performance of the S&P 500 and how the average company that missed expectations compares:[2]

earnigngs data chartLooking at the yellow line, companies that missed both top and bottom line earnings estimates have had a 1-day relative performance of about -3%, meaning that the average company reporting poor earnings results will see negative performance compared to the benchmark index (in this case, the S&P 500)[3]. This is somewhat normal and about the average performance for that category of stocks in the last 17 years. What is abnormal is that companies who are beating both top and bottom line earnings estimates (blue line) are having a relative 1-day performance of 0. In theory, companies beating analyst forecasts should be outperforming the benchmark (S&P 500), but for the first time since 2000, these positive reports are only keeping performance in-line with the benchmark.[4] Why aren’t these stocks performing better and in turn, bolstering the market even higher?

It’s possible that earnings beats were already priced into the market, which explains why these numbers haven’t garnered a reaction in their performance. The market has been mostly flat in the last few months, but positive earnings results are definitely doing their part to keep the S&P 500 and DJIA near all-time highs. Right now, everything boils down to politics and it seems to be the only real driver behind market performance. While there has certainly been a lot of talk of things to come, we will wait to see if and when government takes real action in tax-reform, the debt ceiling debate, and foreign affairs to see a significant reaction in the market.

An investor cannot invest directly in an index. The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results.

[1] https://www.zacks.com/commentary/124249/q2-earnings-season-brings-all-around-strength
[2] http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:price_relative
[3] http://www.barrons.com/articles/a-whole-lotta-nothing-dow-gains-just-25-points-hits-9th-straight-high-1502143313
[4] http://www.businessinsider.com/stock-market-today-earnings-season-share-moves-smallest-since-tech-bubble-2017-8

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